2023-04-11 18:16:40 ET
Summary
- Invesco S&P 500 BuyWrite ETF is a buy-write fund in the ETF format.
- The vehicle is closely tracking the S&P 500 performance this year.
- The fund has a systematic approach to overlaying calls, closely following the CBOE S&P 500 BuyWrite Index roll dates.
- PBP holds a portfolio of equities that mirror the S&P 500, and then writes rolling 1-month calls on the holdings.
Thesis
Invesco S&P 500 BuyWrite ETF ( PBP ) is a buy-write fund in the ETF format. We see a lot of CEFs in this space which tend to have their high yield as the differentiator. The structures are otherwise very similar:
The Invesco S&P 500 Index BuyWrite ETF is based on the CBOE S&P 500 Buy-Write Index . The Fund generally will invest at least 90% of its total assets in securities that comprise the Index and will write (sell) call options thereon. The Index is a total return benchmark index that is designed to track the performance of a hypothetical "buy-write" strategy on the S&P 500® Index. The Index measures the total rate of return of an S&P 500 covered call strategy. This strategy consists of holding a long position indexed to the S&P 500 Index and selling a succession of covered call options, each with an exercise price at or above the prevailing price level of the S&P 500 Index. Dividends paid on the component stocks underlying the S&P 500 Index and the dollar value of option premiums received from written options are reinvested.
One has to keep in mind that outside the yield component, for buy-write funds the composition is not that different between CEFs and ETFs. Both vehicles buy equities and then write call options on the portfolios. In the 'Performance' section below we compare the cohorts and find very similar results. One always has to utilize the 'Total Return' feature though, since CEFs distribute their long term performance via yield, while PBP does it through NAV.
PBP holds a portfolio of equities that mirror the S&P 500, and then writes rolling 1-month calls on the holdings. We can see the latest strike and roll profile via the index:
The idea in itself is not bad, but a systematic strategy here just does not work that well. Just take a step back and think about 2023 - it has been a year where the S&P 500 has been range bound:
We can see how the index has maintained a 385 to 416 range this year. Holding the components and shorting vol at the top of the range should have been a very profitable trade. Instead, PBP is slightly lagging the S&P 500. Why? Because it applies the call writing strategy in a systematic way.
Irrespective of where the SPY is in terms of the above range, the fund will sell calls every month on the designated roll date. This type of call writing will likely never generate alpha, because it does not try to identify alpha. If one simply adjusts the strategy to wait until certain technical indicators become overbought as an example, then we would see proper alpha generation.
CEFs on the other hand have the ability to implement an active management, which in turn can increase or decrease the overwrite percentage based on market conditions. That is why we can see how the CEFs outperform PBP long term in the below 'Performance' section.
PBP does not offer anything superior to just being outright long the index or long some of the premier buy-write CEFs in the space. With a capped upside and a roll strategy that fails to identify oversold conditions PBP will, by its nature underperform long term.
Performance
The fund closely matches the S&P 500 performance this year:
We can see how PBP outperforms versus other buy-write funds in the space, namely the Nuveen S&P 500 Dynamic Overwrite Fund ( SPXX ) and the Eaton Vance Tax-Managed Buy-Write Opportunity Fund ( ETV ).
Longer term PBP lags though:
The same dynamic can be observed on a 10-year basis where PBP is at the bottom of the cohort:
Holdings
The fund holds a portfolio of equities mirroring the S&P 500:
Holdings (Fund Fact Sheet)
Similarly to the index it follows, the fund writes monthly call options on the SPY:
Conclusion
PBP is a buy-write fund. The vehicle is structured as an ETF, but its composition is not that different from the CEFs in the buy-write space. The differentiator for PBP is also its detractor. PBP follows the CBOE S&P 500 Buy-Write Index by writing monthly calls on the S&P 500, irrespective of overbought or oversold conditions. The fund usually covers over 97% of its notional via written calls. This systematic strategy, while appealing in 2023, fails to generate alpha long term. PBP substantially lags the S&P 500 long term since it gives up all the upside. Moreover PBP is a poor choice when compared to the likes of S&P 500 Dynamic Overwrite Fund and the Eaton Vance Tax-Managed Buy-Write Opportunity Fund in the CEF space because those CEFs have an active approach to their option writing strategies.
2023 has been a range bound year for the SPY, which theoretically would have seen an ambitious buy-write fund outperform by selling calls at the top of the range and just holding on when the index was at the bottom. Not the case here with PBP's systematic approach. We do not see any value for a retail investor here. An investor is better off just being long SPY or go for SPXX or ETV in terms of yield generating, active approach buy-write funds.
For further details see:
PBP: BuyWrite ETF Closely Matching The S&P 500 This Year